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Four Ways To Pay For College

OCEAN CITY — Depending on your family’s situation, any one of these options could work for you in funding your child’s higher education expenses.

1. 529 College Savings Plans Advantages include account owner retains control and manages accounts based on investment options available in the plan, primarily portfolios consisting of mutual funds; any earnings are federal- and state0income tax free, if used for qualified higher-education expenses; and treated favorably for federal financial aid purposes. Limitations are investment options limited by plan; can change how existing assets are allocated only once per calendar year; and if not used for higher education, earnings subject to tax and 10% additional tax.

2. Custodial Accounts (UGMAs or UTMAs) Advantages are custodians manage accounts and have unlimited investment options; under custodial control until child reaches age of majority (18, 19 or 21, as defined by your state) and first $950 of annual earnings exempt from taxation and the next $950 taxed at child’s rate and annual earnings above $1,900 taxed at parents’ rate if the child is under 19 (or a full-time student under 24) at the end of the year; and account funds can be used for any purpose benefiting child. Limitations include beneficiaries take control of account at age of majority and can use however they choose, and beneficiary can’t be switched.

3. Coverdell Education Savings Accounts Advantages include tax benefits similar to those of 529 plans; maximum investment flexibility; and account assets can be held in stocks, bonds, mutual funds or certificates of deposit. Limitations are open only to those whose adjusted gross income is less than $110,000 for individuals or $220,000 for a married couple, and contributions capped at $2,000 per year per beneficiary.

4. Family Trusts Advantages are money can be set aside for virtually any purpose, including education; unlimited investment options; can control who gets the money, and when; and beneficiaries can be changed. Limitations are substantial legal cost to establish and maintain and trust earnings are taxable, and rates could exceed normal income tax rates.

(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)